The general intention with the introduction of a fiscal consolidation regime was clear, namely to put the Belgian tax system back in a positive light. After all, many of our neighbouring countries have had a system of fiscal consolidation in place for many years, and Belgium consequently scored badly on this point when international groups were looking to choose an investment location.
The question on everyone's lips is whether we can speak of a Copernican revolution in the tax landscape, or rather just a damp squib.
The Belgian fiscal consolidation regime was introduced as part of the reform of corporation tax (law of 25 December 2017; Belgian Official Gazette 29 December 2017), following which a number of technical improvements were made by the remedial law of 30 July 2018 (Belgian Official Gazette 10 August 2018).
The system of group contributions
As from assessment year 2020, linked to a taxable period starting at the earliest on 1 January 2019, it is possible, under a number of strict conditions, to fiscally offset losses incurred by a group company with the profits of another group company (new art. 205/5 ITC).
Specifically, the system allows a profit-making group company (B) to make a group contribution to a loss-making group company (A). Company B can deduct the group contribution from its taxable base, whereas company A has to include the group contribution in its taxable base. This means that the loss relating to a specific assessment year incurred by group company A can be offset against the profit relating to the same assessment year of group company B.
However, company B does have a 'compensation obligation' towards company A, as the latter sees its losses carried forward reduced. Company B therefore pays a compensation to company A for the 'use' of its losses. This compensation is equal to the tax 'saved' in respect of company B. The compensation is neutral from a tax perspective since it is seen as a rejected expense in respect of company B, and is exempted by company A (art. 194septies and art. 198, §1, 16° ITC).
Just to be clear, this is an optional regime. It is also important that within this system, the (participating) group companies fulfil their individual compliance obligations in any case.
In order for the fiscal consolidation regime to be applied, a number of strict conditions must be met. Unfortunately, in our view, this means that the possibility of implementing this system is de facto restricted to groups of companies that are structured in a specific way. A significant number of groups of companies will therefore be left out of the picture.
In essence, it is required that the companies are linked in a qualifying manner, the settlement will then be subject to a restriction and a number of formal conditions must be met.
The system of group contributions is only possible between so-called associated companies. In this context, there needs to be a strong economic link between the group companies. To this end, a minimum holding requirement is imposed which must be applied for a minimum period of time.
Minimum holding requirement
Both domestic and foreign companies, as well as Belgian branches of foreign companies, are eligible for the offsetting of profits and losses of each other through group contributions. However, the scope is limited to the direct parent, subsidiary or sister company of the tax-liable entity, or the Belgian branches of these companies. The minimum requirements are that:
- the company has a direct 90% holding in the capital of another company, or
- at least 90% of the capital of that company is directly held by another company, or
- at least 90% of the capital of that company is directly held by a third domestic or foreign company and provided that the third domestic or foreign company has a minimum holding of 90% in the capital of the other company
The legislation in force therefore only allows direct holdings. This approach is apparently dictated by budgetary reasons. As such, where an indirect vertical holding exists, this indirect holding is not accepted.
A foreign company will only be eligible if it is established in a member state of the European Economic Area. It can be assumed that Belgium will also have to allow the application of the measure if the joint parent company is established in a country with which Belgium has concluded a double taxation treaty which contains an explicit non-discrimination provision.
The main requirement of a 'direct holding' relationship results in significant limitations in terms of the application possibilities, which is, in our view, deeply regrettable. It is questionable whether such a far-reaching restriction is consistent with the rationale of the measure, in particular the notion of taxing group companies as if they were a single legal entity.
Reference holding period
In order to ensure an adequate economic link, it is also required that the minimum holding described above is maintained for a sufficient period of time. This will be the case for:
- A national or foreign company that qualifies as an eligible company for an uninterrupted period of five years. This five-year period commences on 1 January of the fourth calendar year, for the calendar year on which the assessment year is based.
- Companies with a financial year that coincides with the calendar year that have acquired a qualifying holding during the course of 2018. For these cases, this implies that consolidation is de facto possible from the financial year starting on 1 January 2022, assessment year 2023. However, the holding must also be retained during calendar year 2023 to allow consolidation for assessment year 2023.
- Companies with a financial year that does not coincide with the calendar year (e.g. a financial year ending on 30 September). The acquisition of a holding in November 2018 will allow consolidation as from 1 October 2022. All holdings held on 1 January 2019 are eligible (because 1 January 2019 = 4 years before the year 2023, the year on which the assessment year is based). The holding also needs to be maintained in this case during the course of calendar year 2023.
A practical ambiguity that remains here, even after the amendment already made to the initial draft law, is how to go about things if the companies in questions have a different closing date.
The requirement for a holding period implies that newly-incorporated entities within a group are excluded. As such, their start-up losses cannot be included in the consolidation, as the company must first have been present in the group for five years.
The above-mentioned remedial law has introduced a roll-over provision for determining the holding period for mergers, demergers, transfers and equivalent transactions. Such reorganisations will not interrupt the required holding period, provided that all the companies that are subject to the reorganisation were already linked in a qualifying manner prior to the transaction, and were therefore already eligible for the system of group contributions.
The legislator has also laid down the conditions under which foreign losses can be deducted from Belgian profits. Article 205/5, §4 of the ITC stipulates that only in the event that a qualifying foreign company has definitively ceased its activities and these activities are not taken over by another company of the same group within three years of ceasing its activities, can this foreign company conclude a group contribution agreement with the Belgian group company.
For the sake of completeness, it should also be mentioned that certain categories of companies are excluded from the measure (art. 205/5, §2, paragraph 7 ITC92). The most striking element in this respect is the exclusion of companies that make real estate, or other rights in rem relating to such property, available to one or more natural persons who exercise a mandate, or functions, in the company as director or manager, or to the spouse or children of the above-mentioned person to the extent that that person or their spouse have the legal enjoyment of the income of the children.
Calculation of the group contribution
In order to avoid abuses, the legislator has also decided to limit the amount of the group contribution so that only losses of the current financial year can be offset (no tax components carried forward). However, the wording of the original legal text resulted in the undesirable consequence of double taxation of the group contribution. This resulted in the group contribution not being fully deductible by the profit-making company when the amount of the group contribution was higher than the loss incurred by the other company. In the current text, the deduction of the group contribution is limited only to the extent that the professional loss of the qualifying receiving company is exceeded.
Formal conditions: agreement + statement
The measure can only be applied if an agreement is concluded between two companies, the group contribution agreement, which must essentially contain at least two commitments:
- The loss-making company or establishment must undertake to include the group contribution in the profit of the assessment year corresponding to the assessment year to which the agreement relates. This implies that in the statement, the initial state of the reserves is adjusted by an amount corresponding to the amount of the group contribution.
- The other company undertakes to pay to the loss-making company or establishment compensation equal to the surplus taxes that would have been due if the amount of the group contribution included in the agreement had not been deducted from the profit of the taxable period. This compensation therefore protects the interests of the minority shareholders of the loss-making company.
A group contribution agreement can therefore only relate to one (the same) assessment year. The exercise will therefore need to be made every assessment year, and a new agreement will have to be drawn up. An agreement needs to be drawn up between each of the companies for which there is a settlement, and not one overall agreement for the entire group of companies. The agreement must be in place when the corporate income tax return for the assessment year in question is filed.
For the sake of completeness, according to the explanatory memorandum, this does not mean that the compensation needs to be paid within the same taxable period. However, the proof of payment must be provided when the tax return of the tax-liable entity is filed.
In addition, the tax-liable entity must attach a statement to the return to justify the benefit of the deduction of the group contribution. The aim is to enable an audit of the processing of the group contribution at both companies involved.
As regards the accounting implications, the impact is limited:
- The group contribution is not recorded in the accounts. It only features in the corporate income tax return, namely by being included as a non-deductible expense in the loss-making company and an adjustment to be more in line with the initial state of the reserves in the profit-making company.
- The compensation paid by the profit-making company to compensate for the use of the losses of the loss-making company needs to be recorded in the accounts.
As such, the group contribution is not paid, only the compensation in exchange for the group contribution is transferred (and recorded) from one company to another.
We can conclude that the introduction of the consolidation regime in Belgium is a step in the right direction towards simplifying the corporate tax system. However, a full fiscal consolidation could ensure that genuine administrative simplification can be achieved, as well as taxation that is more in line with the economic reality of a group of companies (e.g. today it still cannot be ruled out that a group that is loss-making on a consolidated basis in Belgium would still have to pay taxes).
The current consolidation system has a significant number of limitations which hamper its application in a determining manner. For example, the required economic link between the participating companies is strictly prescribed. Indeed, indirect holdings are not eligible and moreover, the required 5-year holding period might as well be an 'eternity'. What is unfortunate in this regard is that newly created companies (e.g. set up to develop specific new activities) cannot include their start-up losses in the consolidation because the company must first have been in the group for five years. A legislative initiative would be desirable to address these sore points. But we can already say that this consolidation system is a step in the right direction in terms of stimulating investment.